The Default Next Move For Oil Is Down, And Here’s Why

Panic seems like a strong word, but….

As traders, investors and pundits, we all like to think that what we do is akin to a science. We believe that by working harder and being smarter we can give ourselves an edge, that enough research will reveal to us the next move, either a long term trend or an intraday blip on a chart, and that we can profit from that knowledge. Usually, especially over longer time spans, we are correct in that assumption. Sometimes, however, no amount of fundamental or technical analysis will help.

Over the last week or so we have seen some violent swings in the price of oil, swings that in many ways defy logic. At times like these we have to rely on the art, rather than science, of trading and reading markets. That is not to say that traders and investors at home should be simply making wild guesses. It is just that right now, the oil markets are trading on factors other than the fundamental influences that we are used to. It is hard to chart fear and panic.

Panic may seem like a strong word to many, but having been a denizen of a dealing room for most of my working life I can assure you that that is what many have been feeling. The level of overreaction that we have been seeing to every scrap of news over the last couple of weeks is hard to justify in any other way. It is at times like this that some degree of basic technical analysis, a simple identification of support and resistance, becomes all we have to fall back on. To that extent the science of reading these markets is still intact, but once the significant levels have been identified, assessing in what way they are significant is more of an art.

In terms of the benchmark U.S. oil, West Texas Intermediate (WTI), at least now we have some parameters to work in. The drop halted at around $37 and the surge back up that followed itself turned around at just below $50, so, for now at least, that marks the new range.

If we accept that, then anybody with even the most basic knowledge of trading will know that, at current levels in the high $40s, a bias towards a short position offers a better risk reward ratio with a closer, logical stop loss level. There are, moreover, a few more subtle, psychological factors amongst market participants that make it most likely that the next move will be downwards and therefore that a short bias is preferable to long.

First and foremost, once new, significant levels have been found, re-testing them is almost irresistible to traders and, in historic terms, the lows of the current range are much more significant than the highs. That traders want to see what happens if they get to a seemingly arbitrary level again may seem like a ridiculous reason for a market that affects the livelihood of millions and the wealth of many nations to move, but such concerns won’t bother floor traders or hedge fund managers. For them, pushing back below $40 is more of an intellectual exercise than anything and if it can be forced there and the level breaks, large fortunes can be made.

Of course, all of this goes out of the window if there is a significant shift in fundamentals, either on the demand or supply side. If decent Chinese economic data is released, for example, or if OPEC announces real production cuts, or if the U.S. rig count drops drastically, then traders’ games won’t matter at all, oil will be headed higher.

Until there is any major news, though, it is a question of anticipating what that news will be, or rather the tone of it. Given what has happened since the middle of last year you cannot blame traders for making the assumption that, on balance, any news is more likely to be negative for oil than positive.

It seems, therefore, that all other things being equal, the default path for WTI in the short term is back downwards, to have another crack at the high $30s. There is no real fundamental reason why that should be the case. If anything recent data suggest that when all is said and done, oil trading below where it was in the depths of the last recession is not justified. A recovery at least to around $60 must come soon. Fundamental, scientific analysis like that doesn’t matter at the moment though; what matters is the art of reading the collective mind of the market, and from that perspective oil looks destined for one more push down before sanity returns. By Martin Tiller, Oil & Energy Insider

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16 comments for “The Default Next Move For Oil Is Down, And Here’s Why”

mick

Sep 6, 2015 at 12:54 am

We haven’t even had the market crash yet. Last time oil went to $33 on a crash, starting from $150. This time it will start at $45….

Should be BIG popcorn eating time.

Stavros H

Sep 6, 2015 at 1:45 am

Intelligent article.

Short-term fluctuations have more to do with psychology and are sometimes moving against fundamentals.

In the long-run though, reality will inevitably set in.

interesting

Sep 6, 2015 at 5:05 pm

“sometimes moving against fundamentals”

that is so old school……since when have fundamentals mattered?

jamby

Sep 7, 2015 at 9:34 pm

Since when? Since sooner or later, eventually.

merlin

Sep 6, 2015 at 6:53 am

Given the manner in which China manipulates their market, is any of their economic data accurate?

Robert

Sep 6, 2015 at 9:06 am

That question is a joke! The US Government has never passed an annual audit since the GAO was formed. In fact the GAO has declared the US Government books un-autiable in the last several attempts. Given that in a fiat system the books are the only way of evaluating the country financially, then the US books are a complete fraud and have been for a long long time! It’s entirely likely that US paper is far less valuable than the government is suggesting and this is exactly like a stock market manipulation scheme!

Dave K

Sep 6, 2015 at 11:12 pm

You have to take into consideration different accounting principles. I’m pretty sure GAAP(General Accepted Accounting Principles) is the generally accepted standard for businesses in general but the government and I don’t believe the markets abide by them. Pretty sure .Gov uses GAS(Government Auditing Standards, which makes me chuckle) and it’s common for markets to use non-GAAP standards.

Something in that vein. The point is, what acceptable auditing standards varies, you’re not talking about just good old fashioned math.

Robert

Sep 6, 2015 at 8:38 am

I think the bottom for oil is lower than this article suggests. The commodity boom of the last 15 years has been driven by China and resulted in peak oil prices never seen before. In 2009, oil bounced off of $35 only because of continuing strong demand from China. This time China may not be able to supply this demand if the downturn there is strong enough. In the end it it the lack of Western demand for Chinese products that will determine the downside in China which as the worlds number one manufacturing country cannot keep it’s factories producing if the world’s number one consumer economy has a population that is broke and cannot buy their stuff.
Also you have the Saudis who drew up their budget this year based upon $90 oil who will simply now produce twice as much oil to meet their budget. And of course, the Iran Nuclear deal that once enacted will release another million barrels a day into the market.
In all it is not unlikely that we will again see 10 dollar oil before this rout is completed!

Marco

Sep 6, 2015 at 8:59 am

The fracking industry goes bankrupt and defaults on a $1 Trillion debt… it leads to credit destruction, deflation and a financial crisis… which leads to a new government bail out of the banks… a new round of QE to fight deflation… the banks consolidates their power and wealth… big oil buys the fracking industry for pennies… the world moves on towards a new boom.

Oil as traded on futures’ exchanges is a finance asset and is dealt with as such. The higher the price in finance markets, the better for drilling companies, traders and their lenders.

Sadly for these folks, oil as a product is sold to proletarians at gas stations around the world … or it is not sold.

It doesn’t matter what the drillers, lenders, traders and analysts want or need if the proles don’t pony up, fuel extractors and their ilk are stranded. High prices — at any level — are a bridge too far for bankrupt customers.

Since 2000 end user-customers have been excluded from fuel markets. Borrowing capacity has been shifted toward firms: the firms need the funds to pay for high cost megaprojects, ultra-deepwater- and arctic drilling, oil sand mining and workovers on depleted conventional fields. No money, no fuel. The very same shift of borrowing capacity starves the end users of funds. No money, no purchases leaving drillers with millions of extra barrels they cannot sell.

This is what is taking place under the noses of analysts right this minute!

As drillers falter, so do banks and creditors => less funds for both customers AND drillers => credit system unravels leaving only actual returns on fuel use as means to pay for drilling, processing and distribution.

Actual returns = agriculture, some construction, some emergency, some delivery and transit use … about 5% of current consumption.

This is why the cars industry is in death-mode, why all the cars are going away to their promised land. Car use is non-remunerative. Driving a car does not pay for it nor does it pay for the fuel any more than watching TV pays for the TV. What pays is trillion$ in debt. Now the debt must be repaid …

(shakes head … )

Dan Reich

Sep 6, 2015 at 6:33 pm

Now that is an intelligent analysis! People do need the car to get to work though. But I see your point. We’re burning up the only real capital in our engines.

Nick Kelly

Sep 6, 2015 at 7:15 pm

A few years ago I had to stop driving my car for exactly 90 days. The cost in taxis and buses to do a fraction of my normal routine far exceeded the cost of running the car. Where I live a bus ticket is 2.50 one way- why they sell one way tickets is debatable since 99 percent of passengers will go home- but that’s what they do.
If I did one trip (5$) I was already even with gas and insurance for my car, a little reliable Japanese thing long since paid for.
If I did two trips or took a taxi I was far in the hole.

Nick

Sep 7, 2015 at 5:47 pm

Ah…the trick is to move closer to your work, or closer to mass transit. Most people spend such a large proportion of their salary on their car and fuel. I don’t think most people can imagine how different life could be without such a reliance.

Julian the Apostate

Sep 6, 2015 at 5:28 pm

ROFLMAO. The inmates are running the asylum and he’s trying to REASON with them!

john

Sep 9, 2015 at 4:27 pm

My charting technique has oil retreating to <$10 a barrel.

To me this indicates that scientists have actually discovered a new form of energy that will make oil relatively worthless… a prediction I have read on an esoteric philosophy website that has a reasonable track record in the prediction business.

Such a discovery will turn world events and geopolitics on their heads.

John, I believe in “new forms of energy” and similar miracles as soon as I see them. Until then, in my book, this world remains addicted to oil. That doesn’t mean that your price prediction cannot be correct. US natural gas plunged to totally silly lows in 2012, and has remained below the cost of production ever since, ruining companies that are drilling for it. This might happen to oil as well, though I doubt it will go that extreme … but it might.